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Difficulty: MediumMerchant, Development, and Specialized Banks

Which of the following activities forms a primary distinguishing function of a merchant bank compared to a commercial bank in the financial system?

  1. A
    Operating cheque accounts and accepting small retail demand deposits from the general public
  2. B
    Issuing legal tender notes and acting as the official lender of last resort to financial institutions
  3. Underwriting corporate security issues and providing acceptance facilities for bills of exchangeAnswer
  4. D
    Granting short-term retail overdrafts to small-scale sole proprietorship enterprises for daily operations

Answer

Underwriting corporate security issues and providing acceptance facilities for bills of exchange
Underwriting corporate security issues and accepting bills of exchange are core wholesale investment banking functions that distinguish merchant banks from commercial retail banks.

Step-by-Step Solution

1
Differentiate between retail banking (commercial) and wholesale banking (merchant).
Commercial banks deal directly with the general public, providing retail services like savings/cheque accounts and short-term retail loans.
Merchant banks are prohibited from accepting small retail demand deposits.
2
Identify the primary functions unique to merchant banking.
Merchant banks focus on corporate clients by engaging in underwriting shares and debentures, bill acceptance, equipment leasing, and project finance.
These wholesale investment banking functions differentiate merchant banks from standard commercial banks.

Key Concept

Functions and distinctions of merchant banks vs commercial banks
Estimated Time:1m 0s
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Topics

Merchant, Development, and Specialized Banks

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